2012).
The United States is an example of a public and optional system; Spain is an example of a public and
bundled i.e. not optional system; Germany is an example of a private and optional system; and the UK
is an example of a private and bundled i.e. quasi- mandatory system. France and Belgium are in the
middle of this classification as they operate bundled public -private systems with a division in private and
public sector flood risk financial responsibility. The Netherlands, as it currently stands with the WTS, is
an example of an extreme public system and, as compensation is paid from general taxation, one which
is in no way voluntary.
An approach taken by Jongejan and Barrieu (2008) also attempts to characterise systems by a
composite of attributes based on types of government and private sector involvement. Their
classification, however, fails to to include a category of system where the only role for the public sector is
that of government as industry regulator and national lawmaker. This fifth category has been added for
the purpose of this thesis.
The first category is where the state makes use of the country’s legal system to assess when a flood is a
national disaster and compensation is triggered to victims. The country’s existing social welfare system
is used to compensate people to the extent required under law. Such arrangements are frequently
based on discretionary or ad hoc rules and guidelines. The Dutch WTS arrangement falls broadly under
this category. In Germany, state compensation to flood victims has been provided alongside private
flood insurance (Jongejan and Barrieu, 2008). The penetration of private flood insurance is
correspondingly low in Germany due to the crowding out of private insurance by a parallel public
compensation system.
In the second category, flood insurance is quasi-mandatory as government mandates that it be
bundled with property insurances, such as fire. This approach was recently applied in Belgium and has
been operational in France under the NAT/CAT since 1982. This system is based on principles of
solidarity as policyholders exposed to different natural catastrophe hazards such as earthquake, fire or
windstorms in effect subsidise each other’s premiums regardless of the actual extent of the flood risk
individuals face.
In a third category, governments establish compensation funds to help compensate victims of natural
disasters. Such insurance pools are becoming increasingly popular solutions to insure natural disasters
and are not necessarily paid for by the state. For example, the California Earthquake Authority is
financed through a variety of revenue streams including premiums from policyholders, membership
contributions from insurance companies, selling debt such as CAT bonds, reinsurance and through their
own investments (ibid).
The fourth category includes systems where public–private (PP) partnerships have been established.
An example is the USA where the government established a public flood compensation fund but it is
administered by private insurance companies. Such arrangements are usually set-up to increase the
penetration of flood insurance coverage with premiums designed to be affordable in order to stimulate
uptake by as many at-risk communities as possible. The US National Flood Insurance Program (NFIP) is
a well-known instance of a PP system of national flood insurance. The responsibilities are split, with
private insurance companies administering policy writing, loss adjustment and claims, while the US
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government, through FEMA and the Federal Reserve, acts as underwriter. Catastrophe funds can also
be created by the state or the insurance industry or in combination.
In the fifth category, not mentioned by Jongejan and Barrieu, are systems where the intention is that
private flood insurance is provided by the free market and the state plays no direct risk-bearing role
in flood compensation but does have influence as regulator. The UK is an example of this kind of
arrangement.
Variations of all five categories can be found in operation in Europe. However public-private
arrangements are becoming the most common with only a handful of countries operating pure public
systems - notably Spain and certain cantons of Switzerland. Even the UK is moving from a pure private
system towards a PP system with the introduction of the government backed 'Flood Re' to cover high
risk properties. In typical multi-tier compensation systems, however, trigger events make a simple
public-private classification problematic. For example, in public-private arrangements, it is common that
the government is responsible for a layer of the risk only after official declaration of a disaster. Lower
levels of flood risk, for example small local incidents remain the responsibility of the private sector, as is
the case in the French NAT/CAT system. Therefore, the extent of flood damage will determine with
which layer of the system responsibility lies. It is argued by Jongejan and Barrieu (2008) that a
multilayer system involving public and private actors would appear to be offer the greatest resilience as
it combines the financial stability of the state with the efficiency of private markets, particularly relevant
where there are a high numbers of transactions to process.
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